Who are the real customers of GP corporates: Doctors or patients?

Your guide to the questions at the heart of the multi-million dollar legal stoush between Healius and the tax office.

During the past couple of years, a legal battle between the GP corporate Healius and the Australian Tax Office has been running through the courts.

It is of interest to many doctors because it appears to relate to an issue that's wrapped in much emotion for the medical profession.

When GPs sign up to work for a corporate, are they customers being offered the facilities and services needed to practise their vocation — for instance, the medical centre, the administration staff, the nursing staff?

Or are they in fact part of the commercial infrastructure used by the corporate to operate its medical centres and attract patients?

It is important to stress that the actual legal questions at the heart of Healius' battle are a little more monetary in nature.

The courts have been asked to rule on whether the historic upfront payments made by the medical centre operator to its doctors were of a capital nature, and as such, not deductible against its assessable income.

And this is a complex area of tax law. As is no doubt familiar to all, Healius ( previously known as Primary Health Care Limited) is in the business of developing and operating medical centres.

Medical practitioners at the centres conduct their own practice, but all the facilities and support services they require, including reception and billing services, are provided by Idameneo, a wholly owned subsidiary of Healius.

Historically, the typical arrangement used by Healius to populate its centres with doctors has been to enter into a sale of practice deed and an agreement for the provision of services.

Doctors entering into such arrangements in the past usually agreed to conduct their medical practice from an Idameneo centre for an agreed period (usually five years), and were paid lump sums running to several hundreds of thousands of dollars.

Between June 2003 and June 2007, the Australian Tax Office (ATO) assessed Healius' income on the basis that these lump sum outgoings were 'capital or of a capital nature' within the meaning of the Income Tax Assessment Act 1997.

This meant that Healius was not entitled to deduct the lump sums against its assessable income, resulting in Healius facing significantly higher tax demands.

Healius appealed to the Federal Court of Australia, and in 2019, it won, at least initially.

The court considered the purpose of the lump sum payments and found:

• The medical centres did not provide healthcare services to the public. They carried on a business of providing a comprehensive range of services and facilities to doctors at Idameneo's medical centres.
• The doctors were the medical centres' customers. The more doctors who were engaged at the medical centres, the more profitable those medical centres would be for Idameneo and ultimately Healius.
• Although the doctors each entered into a sale agreement, they did not actually sell their practice to Idameneo. Each doctor continued to run their own medical practice at Idameneo's medical centres; and so it was the doctors who provided services to patients.
• The lump sum payments were not capital in nature, and so the deductions claimed by Healius were available.

However, the ATO (strictly speaking, the Tax Commissioner) appealed this ruling to the full federal court; and in a decision handed down last month, the initial decision was reversed.

It's worth looking at the reasons why.

Again, the question at the heart of the appeal was whether payment of the lump sums to doctors was properly characterised as capital (were the payments for GPs part of the company's infrastructure, along with its bricks and mortar?) or for revenue.

According to the full court, the chief if not critical factor in determining the character of the lump sum payments was to look at the advantage that Healius (as a taxpayer) sought to secure by making the payments.

This required a "practical commercial inquiry" and a "wide survey and exact scrutiny of the taxpayer's activities", the full court said.

In direct contrast to the court's earlier decision, it was held that the nature of the business conducted by Idameneo was not properly described as a service company to doctors.

The judges found it was much more than that.

The arrangements with practitioners for which they were paid lump sums "were not directed to simply securing each practitioner as a customer of Idameneo".

The arrangements were essential to the operation of the medical centres because "they enabled Idameneo to control the way those medical practitioners conducted their practices from the [centres] in all significant respects save for the professional judgements to be made in providing
medical services".

In other words, the lump sum payments were more than just payments intended to secure GPs as mere customers.

According to the court, each lump sum was a payment for the practitioner to: (a) cease operating an existing practice; (b) commence trading as part of an Idameneo medical centre under its required mode of practice; and (c) accept a restraint on establishing a competing medical practice.

Securing the commitment of doctors in these respects was an essential part of Idameneo's business, the court ruled.

Together with the physical assets comprising each medical centre, the commitments formed the commercial infrastructure that was then deployed by Idameneo to earn its revenue by attracting patients to its centres.

Hence, the lump sum payments were capital outgoings; and consequently, the tax refunds sought by Healius were not available.

The full court distinguished earlier decisions in which expenditure incurred to secure customers was held to be deductible from revenue.

One case cited was BP Australia Ltd vs Federal Commissioner of Taxation (1965).

In this case, BP entered into agreements with service station owners to sell only BP branded petrol.

Each owner agreed to brand their site as a BP site for the term of the agreement. BP paid a lump sum to each owner and claimed the lump sums as allowable deductions.

It was held in that case:

• BP was already set up to provide petrol when it entered into those agreements, and it did not in that sense need the agreements as part of its profit-making structure. The agreements were not part of its infrastructure. However, in BP's market of operation, it was necessary to follow the practices of BP's competitors and enter into the agreements with service station owners in order to secure sales of petrol.
• The payments were made as part of
• the cost of performing income-earning operations.
• These lump sums were therefore paid on revenue account and were allowable as deductions.

Another case cited by the Federal Court was NAB vs Commissioner of Taxation (1997).

Here, NAB made a payment to the Commonwealth to secure the exclusive right to be the lender under a housing scheme for the Australian Defence Force.

It was held in that case:

• The bank did not need to secure the contract with the Commonwealth in order to be in business. It already had the resources and financing facilities to be able to provide the loans.
• The upfront payment was merely to secure a bundle of loan contracts as part of operating NAB's business.
• The payment was therefore made as part of the trading activities of the bank, and hence an allowable deduction.

In short, BP and NAB were paying for future custom, whereas Idameneo was paying for something that formed part of its essential commercial infrastructure.

In the federal court's words: "It was not enough for Idameneo to build the centres and offer services in order for it to establish the business of operating the centres.

"It also needed to secure arrangements with medical practitioners by which they would commit to [Idameneo's operating] model ... Without those commitments it had no business."

Each time Idameneo paid a lump sum to a doctor, it was therefore "maintaining the structure of its business" and "ensuring it had in place the commitments that it needed to operate its business".

Without that commitment from its doctors to conduct their practice at an Idameneo medical centre, the company would lack the very infrastructure needed to operate the business.

There is a long line of case law that considers the characterisation of payments as revenue or capital outgoings.

As mentioned, this is a complex area of taxation law, and at the time of writing, Healius had applied to the High Court of Australia seeking special leave to appeal the full federal court's ruling.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mr David McMullen
Panetta McGrath
Level 5, 179 St Georges Terrace Perth WA 6000
Perth
WA 6000
AUSTRALIA
Tel: [phone]
URL: www.pmlawyers.com.au

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